It can be overwhelming to think about energy security in the United States. Fully 55% of the nation's oil suppliers are inherently unstable or are unfriendly toward it, while another 14% have declining production. As the world's biggest per capita consumer of oil, it's not a good situation.

The Global Race for Uranium

Unreliable oil supplies are a big problem for the US. Things are better on the coal front: The country produces lots of thermal coal domestically, providing one stable contribution to the energy scene. Natural gas is another stable path forward, provided the fracking debate doesn't derail domestic production increases. But there's another resource that plays a major role in America's energy scene, and the outlook for that resource is as bad as the outlook for oil.

(As an aside, a Canadian company is developing breakthrough technology that the Middle East sheiks desperately need to extract "new" oil – oil that until now has been trapped by impenetrable rock deep beneath the desert. Learn more about it.)

We're talking about uranium. The United States is the world's largest producer of nuclear energy. The 104 nuclear reactors spread across the country provide 20% of the nation's electricity. And unless the country starts to take some proactive steps to lock in long-term supply agreement and encourage greater domestic production, the US is going to find itself very short on this essential resource.

The US was once one of the top uranium producers in the world. Today, there are only nine uranium mines operating in the country, which means the US has to import more than 90% of the yellowcake it needs to feed its reactors. Sourcing all those imports has been relatively easy until now, because of a deal with Russia to decommission nuclear warheads.

At the end of the Cold War, the US and Russia both had too many nuclear warheads, so they joined forces to build a downblending facility in Russia that turns the highly enriched uranium used in weapons into the partly enriched kind used in reactors. The result is that the US has become accustomed to cheap, reliable nuclear fuel. No less than half of the 40.5 million pounds of uranium used to feed US reactors comes from this deal, which is known as "Megatons to Megawatts."

The problem is, the deal is ending. After 18 years, Megatons is set to expire in 2013. It will not be extended because it made the US reliant on Russia for uranium but also restricted Russian uranium producers from selling directly to US utilities. With the States now addicted to uranium, Russia is drooling over the opportunity to sell uranium to the US at market rates.

When Megatons ends, the US will be forced to join the global battle for uranium. And guess what? There is not enough. Well, right now there is just enough uranium – including that from decommissioned warheads – to feed the world's 440 operating reactors. But with 62 more under construction, another 156 planned, and a further 343 proposed, uranium demand is set to outpace supply in the next five to ten years.

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After Japan's double whammy earthquake-tsunami hit the Fukushima Daiichi nuclear power station, swamping the backup generators that power the essential cooling systems and leading to the worst nuclear disaster since Chernobyl, it seemed as though the world was turning away from nuclear power. The key word, however, is "seemed" – in reality, the powerhouses behind nuclear growth barely blinked. China's nuclear program is the world's largest by far, with 26 reactors under construction, 51 planned, and other 120 proposed; after a brief pause to review safety regulations China is continuing with its plans unabated. The nuclear future also continues in India, where six plants are being built and another 57 are planned or proposed, and in Russia, which is building 10 nuclear reactors and laying the groundwork for another 44. In this context, Germany's decision to shutter its nine reactors is pretty much insignificant.

The nuclear renaissance is in full swing and a supply crunch is looming, even if uranium prices don't yet reflect these realities. In a coincidence of timing, this is happening just as the US needs to find itself new uranium suppliers. With so much competition for global supplies, the answer lies underneath its own soil. The question now is whether Americans can embrace – or at least accept – the need for new uranium mines in the United States.

The nuclear industry has struggled against anti-uranium mentalities since its inception. People are right to be concerned about a substance that emits radiation and which can be used to make the most devastating weapons known to man. But society also needs to recognize that nuclear reactors play a vital role in our world, generating baseload energy while producing very low emissions and maintaining an impressive safety record. (For all the angst about nuclear safety, the only time people have died from a reactor problem was at Chernobyl, and the problems there were human, not technical. Compared to the number of people who die every day in the world's coal mines or who suffer from asthma or other health problems because of coal-related smog, nuclear generators are the far safer option.)

Despite the fact that one in every five homes or businesses in the US is powered by nuclear energy, this kind of logic has not yet penetrated the mainstream. Scores of Americans still associate "nuclear" and "uranium" with radiation, illness, and catastrophe to such a degree that many states have banned uranium mining and the United States has not build a new reactor for 30 years. Thankfully, attitudes are starting to change.

After that 30-year hiatus, over the last four years the country received 16 license applications to build 24 new reactors and the first four to six units are expected to come online by 2020. The Virginia state legislature has the National Academy of Sciences working on a study of uranium mining and milling, meant to advise legislators ahead of a 2012 vote on whether to lift the state's uranium mining ban. Several junior uranium companies are advancing projects in America and are finding supporters.

The US is by no means the only country to battle with anti-uranium ideologies. As a major uranium producer, Australians have had to learn to live alongside uranium mining, transportation, and exportation. In the latest step in this long process, Australia's governing Labor Party recently decided to overturn a decades-long ban on selling uranium to India. The ban was based on India's refusal to sign the Nuclear Non-Proliferation Treaty, but that refusal is more nuanced that it first appears: India is committed to the complete abolition of nuclear weapons, and therefore refuses to sign a treaty that enshrines the double standard whereby those who already have the bomb can keep it but others are banned from developing it.

That Australia is acknowledging this level of nuance is encouraging, because issues around uranium mining and nuclear power are always complicated. It is difficult for populations to understand the difference between radioactive and harmful, or between 100% safe and acceptably safe. More generally, choosing between energy options is always difficult: Would you rather allow new domestic uranium mines (potentially in "your back yard") or be forced to shutter your country's nuclear reactors because of insufficient uranium supplies and therefore have to burn even more on coal and natural gas to generate electricity?

Questions like that aren't pretty, but they need to be answered, because the US needs uranium and global supplies are being snapped up. For example, just last week the China Guangdond Nuclear Power Corp finalized a deal to take over Kalahari Minerals (LON.KAL) for US$991 million to get its hands on Kalahari's 43% interest in Extract Resources (T.EXT). Extract owns the Husab uranium project in Namibia, which is currently the fourth-largest pure uranium deposit in the world. If built, the mine being planned at Husab would be the second-largest uranium mine in the world. Gee, wonder why China would want an ownership stake in that?

The starting gun on the global race for uranium already went off. China, India, and Russia are maneuvering for position. The United States needs to decide whether it wants to lace up its runners and get in the race – an expensive course with an uncertain outcome – or surmount the social obstacles around domestic production and start tapping into American uranium deposits. With Megatons ending, it's one or the other.

In our upcoming Casey Energy Report (which will be released just before Christmas), the energy team will be laying bare our forecasts for the entire energy sector in 2012, including an examination of uranium price movements, political developments, and market events. If you're interested in learning more about the coming uranium crunch, consider a risk-free trail subscription to Casey Energy Report – and if you try it before December 16, you'll also get a free trial subscription to Casey International Speculator.

Additional Links and Reads

The world's biggest exporter of crude oil boosted output in November to its highest level since 1980, pumping out just over 10 million barrels a day. Whether the kingdom will continue producing at this rate going forward is yet to be seen – the Organization of Petroleum Exporting Countries (OPEC) will meet on December 14 to set output targets for the start of 2012. Last month OPEC forecast that demand for its crude next year would average 30 million barrels per day, not including production from Iraq, which has no quota. Quotas for the other members are soft targets – the 11 members with quotas have supposedly been limited to cumulative production of 24.85 million barrels a day since December 2008, but in November their combined production totaled 27.65 million barrels a day.

With production from Libya set to resume and production from Iraq and Angola on the rise, OPEC will likely keep its levels constant or slightly lowered to make sure the market is not oversupplied and therefore ensuring continued strong oil prices.

In this interview, Dr. U.D. Choubey, the Director General of SCOPE (the professional organization representing public entities operated by India's central government) discusses the deregulation of oil prices in India. Eighteen months ago the government deregulated oil in India, allowing oil companies to move their prices in tandem with international crude prices, incentivizing efficiency and competitive pricing. The move has been both derided and applauded in India.

Choubey points out that in the new deregulated India, the depreciation of the rupee against the US dollar is very significant because India imports some 75% of its crude oil needs. Even if international crude prices fall, the weakening rupee could easily negate any benefits in India. The key lesson to learn from that is that India needs to pursue exploration aggressively, finding ways to entice foreign investment in the hopes of increasing domestic production down the road.

Exxon Mobil (N.XOM) sees natural gas overtaking coal as the leading fuel for generating electricity in the United States and in the rest of the world by 2025. The energy giant expects global energy demands to grow by about 30% by 2040 as the world's population grows to 9 billion. From now until 2025 coal use will continue to grow, primarily in developing nations like China and India, but thereafter coal demand will start to drop off as nations seek to reduce greenhouse gas emissions and as China's population starts to decline. Exxon believes that natural gas' abundance and cleaner-burning nature will make it the perfect alternative.

French oil giant Total is planning a pipeline to take Ugandan oil to the Kenyan coast; and at the World Petroleum Conference last week the company proposed adapting the route to also incorporate oil produced in the newly independent country of South Sudan. When it seceded, South Sudan took ownership of three-quarters of former united Sudan's output of 490,000 barrels per day, but South Sudan now relies on Sudan for oil transportation infrastructure, including the need to use Sudan's export terminal on the Red Sea. Total's proposal to send a pipeline through South Sudan would eliminate this reliance, which is one of many issues causing much strain between the nations.

The South Sudan Liberation Army (SSLA) has other ideas. The rebel group immediately issued a statement threatening violence against Total if the company tries to start construction without "expressed permission from SSLA." The SSLA does not support South Sudan's government, headed by President Salva Kiir Mayardit, and the rebel group claims to control large areas of the oil-producing state of Unity.

Pipelines are essential to our oil-based world because they are the best (and often only economic) way to move oil to from well to market. TransCanada's (T.TRP) proposed Keystone XL pipeline caused quite the stir in North America; the vehement (and often misinformed) opposition made oil industry players shake their collective heads, wondering how else people expect to fill their gas tanks. Compared to threats from armed rebel groups, at least the Keystone ruckus seems manageable, because clearly it could be much worse. And for a farcical look at pipeline opposition, check out this article about how an oil bucket brigade is a perfect solution to pipeline woes.

After two years studying wells in Wyoming, the Environmental Protection Agency (EPA) announced that chemicals found in drinking water supplies in the town of Pavillion are "likely" associated with hydraulic fracturing. The Agency's findings are among the first by the government to link fracking with groundwater contamination and add further controversy to an explosive debate that has already led some areas, such as New York State and the Canadian province of Quebec, to ban fracking. Immediately following the announcement, shares in several fracking-focused companies fell between 4-6%, with Wyoming-active Encana (T.ECA) taking the hardest hit.

Many news articles about the situation, however, failed to highlight some key clauses in the EPA's decision. First, the Agency was not definitive in blaming fracking for the water problems. Second, the EPA released the study before it had gone through the peer review process. Third, and most importantly, the Wyoming field is very different from most fracking areas. The gas-bearing rock being fractured in Wyoming was only about 1,220 feet deep, and some water wells reached as far as 800 feet. By comparison, the gas-bearing rocks targeted by fracking operators in Texas and Pennsylvania are several thousand feet below any water supplies. Also, unlike shale formations like the Marcellus in Pennsylvania and the Barnett in Texas, the Wyoming gas was in a sandstone reservoir and did not have a geologic barrier or "cap" atop the gas-bearing layer. With so many major geologic differences between the fracked wells near Pavillion and those in shale basins, industry experts caution against extrapolating any conclusions from the Wyoming study.

The EPA is conducting a broad study of fracking, with preliminary results expected in early 2013. Until then, we will hold to our belief that fracking is safe and that the most dangerous aspect of fracking is the misinformation that is being actively spread by fracking opponents. If you're interested in reading more about fracking and our position on it, please read our recent article titled Don't Make Me Frack Up., which was part of the November edition of our flagship energy newsletter, Casey Energy Report.

Dec 13, 2011

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